ROTH IRA DISTRIBUTIONS

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" colspan=2 height=90 BGCOLOR="#006699" TEXT="#080000" bgproperties="fixed" background="0be285a1erlcgo.gif"> <div> <FONT SIZE="5" COLOR="#FFCC66" FACE="Arial" ><B>INDIVIDUAL RETIREMENT ACCOUNTS</B></FONT><B>     |     </B><A HREF="index.htm" TARGET="_top" TITLE="INDIVIDUAL RETIREMENT ACCOUNTS"><U><B>home</B></U></A></div> <div> <A HREF="id22.htm" TARGET="_top" TITLE="TRADITIONAL IRAs"><U>TRADITIONAL  IRAs</U></A>   |   <A HREF="id23.htm" TARGET="_top" TITLE="ROTH IRAs"><U>ROTH IRAs</U></A>   |   <A HREF="id24.htm" TARGET="_top" TITLE="SIMPLIFIED EMPLOYEE PENSIONS (SEPIRAs)"><U>SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAs)</U></A>   |   <A HREF="id26.htm" TARGET="_top" TITLE="SIMPLE IRAs"><U>SIMPLE IRAs</U></A>   |   <A HREF="id25.htm" TARGET="_top" TITLE="IRA Custodians"><U>IRA Custodians</U></A>   |   <A HREF="id72.htm" TARGET="_top" TITLE="Savers Credit"><U>Saver's 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TITLE="mailto:instructor@wallstreetinstructors."><U><B>E-Mail An Instructor</B></U></A></div> </NOBR></tD> </tR> </TABLE></div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Module 2</B></div> <div> <B>ROTH IRAs</B></div> <div> <B>__________________</B></div> <div> <A HREF="id74.htm" TARGET="_top" TITLE="ROTH IRA CONTRIBUTIONS"><U><B>ROTH  IRA CONTRIBUTIONS</B></U></A></div> <div> <B>ROTH IRA DISTRIBUTIONS</B></div> <div> <A HREF="id90.htm" TARGET="_top" TITLE="ROTH ROLLOVERS CONVERSIONS"><U><B>ROTH ROLLOVERS & CONVERSIONS</B></U></A></div> <div> <A HREF="id92.htm" TARGET="_top" TITLE="Review Questions Module 2"><U><B>Review Questions Module 2</B></U></A></div> <bR> <bR> <div> <A HREF="id22.htm" TARGET="_top" TITLE="TRADITIONAL IRAs"><U>TRADITIONAL  IRAs</U></A></div> <div> <A HREF="id23.htm" TARGET="_top" TITLE="ROTH IRAs"><U>ROTH IRAs</U></A></div> <div> <A HREF="id24.htm" TARGET="_top" TITLE="SIMPLIFIED EMPLOYEE PENSIONS (SEPIRAs)"><U>SIMPLIFIED EMPLOYEE PENSIONS (SEP-IRAs)</U></A></div> <div> <A HREF="id26.htm" TARGET="_top" TITLE="SIMPLE IRAs"><U>SIMPLE IRAs</U></A></div> <div> <A HREF="id25.htm" TARGET="_top" TITLE="IRA Custodians"><U>IRA Custodians</U></A></div> <div> <A HREF="id72.htm" TARGET="_top" TITLE="Savers Credit"><U>Saver's Credit</U></A></div> <div> <A HREF="id89.htm" TARGET="_top" TITLE="REVIEW QUESTIONS"><U>REVIEW QUESTIONS</U></A></div> <div> <A HREF="id50.htm" TARGET="_top" TITLE="PRINTABLE VERSION"><U>PRINTABLE VERSION</U></A></div> </td> <td valign="top" height=390 BGCOLOR="#FFFFFF" TEXT="#080000"> <div> <I>ROTH IRA DISTRIBUTIONS</I></div> <bR> <div> The key advantage of a Roth IRA is that withdrawals from the account are tax-free.  To qualify for the tax-free status, the distribution must satisfy a <B>five-year holding period</B> and also meet one of four additional requirements.  To be tax-free, the distribution must be made:</div> <bR> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">after <B>age 59½</B>,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">to a beneficiary upon the individual's <B>death</B>,</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">due to <B>disability</B>, or</div> <div> <IMG BORDER="0" SRC="Symb075c00b700f000000000.gif" HEIGHT="16" WIDTH="24" ALIGN="bottom" HSPACE="0" VSPACE="0">to pay for “qualified <B>f</B><B>i</B><B>rst-time homebuyer</B> expenses”.</div> <bR> <div> While similar to the list exemptions for the 10% penalty on premature withdrawals from traditional IRAs — this list serves a different purpose:  determining whether the withdrawal will be tax-free. </div> <bR> <bR> <div>   <A NAME="five_year_holding_period"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A><FONT SIZE="3" COLOR="#006699" FACE="Arial" ><B>Five year holding period</B></FONT></div> <bR> <div> Tax-free distributions are permitted only if the contributions have remained in the Roth IRA for five "tax years".  Since contributions may actually be made up to April 15th of the following calendar year, the five-year holding period may not actually be five full, calendar years.</div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="2" CELLPADDING="10" CELLSPACING="1" WIDTH="483" BORDERCOLORLIGHT="#FFCC66" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#006699 > <tR> <tD VALIGN=TOP HEIGHT= 303 WIDTH="455"><div> <B>Example: </B></div> <bR> <div> <B>Margo Healey, age 56, makes a contribution to her Roth IRA on April 14, 2007, designating the contribution for 2006. Her holding period begins running in 2006 (the tax year of the contribution), not in 2007 when the contribution was actually made.  The five year holding period will end on December 31, 2010 (assuming Margo is a calendar year taxpayer).  Distributions prior to December 31, 2010  will not qualify for tax-free status.</B></div> <bR> <div> <B>Assume Margo contributes $4,000 to her Roth IRA each of the next nine years.  In 2015, at age 65, Margo withdraws the entire amount from the Roth IRA. The account value is $75,000 ($40,000 of contributions plus $35,000 of accumulated earnings). She may take the distribution tax-free: she satisfies the 5-year holding period (since the first contribution) and she is over age 59½.</B></div> <div> <B>     </B></div> </tD> </tR> </TABLE></div> <bR> <bR> <bR> <div> <B> <A NAME="nonqualified_distributions"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>Nonqualified distributions</B></div> <bR> <div> If an individual withdraws funds from a Roth IRA without satisfying the holding period and other conditions (age 59½, death, etc.) the distribution is "nonqualified", meaning the earnings portion of the withdrawal is taxable.  Contributions were made in after-tax dollars, so return of contributions is always tax-free.  The tax code treats nonqualified Roth distributions as being made from contributions first, then earnings.  [This is analogous to FIFO, “first-in, first-out”, accounting.]  Thus, no portion of a distribution is treated as taxable earnings until the total distributions from the Roth IRA exceeds the total amount of contributions.</div> <bR> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="2" CELLPADDING="2" CELLSPACING="1" WIDTH="483" BORDERCOLORLIGHT="#FFCC66" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#006699 > <tR> <tD VALIGN=TOP HEIGHT= 213 WIDTH="471"><div> <B>Example:  </B></div> <bR> <div> <B>Using the facts from the case above, Margo contributes to her Roth IRA each year beginning in tax year 2006.  By 2009, the account value has grown to $24,000 ($16,000 of contributions and $8,000 accumulated earnings).  In 2009, Margo takes a distribution of $18,000 from the account to pay emergency medical bills for her mother.  Since the five-year holding period has not elapsed, the distribution is "non-qualified".  The first $16,000 withdrawn is a return of contributions and is not taxable.  The remaining $2,000 is taxed as ordinary income in 2009.</B></div> <bR> </tD> </tR> </TABLE></div> <bR> <bR> <bR> <div> <B>Please note:</B> Nonqualified distributions from Roth IRAs, and non-deductible traditional IRAs are treated differently (even though both are funded with after-tax dollar contributions).  Roth IRAs assume nonqualified distributions to be taken on a FIFO basis: tax-free contributions first, then taxable earnings.  In traditional, non-deductible IRAs, each distribution is considered to be partly taxable earnings and partly tax-free return of principal.   For a person choosing between withdrawals from a Roth IRA vs. a traditional IRA,  this difference can be important — especially for partial withdrawals.</div> <bR> <bR> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="2" CELLPADDING="8" CELLSPACING="1" WIDTH="677" BORDERCOLORLIGHT="#FFCC66" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#006699 > <tR> <tD VALIGN=TOP HEIGHT= 158 WIDTH="653"><div> <B>If Margo had contributed to a traditional non-deductible IRA instead of a Roth IRA, her withdrawal in 2009 would be taxed differently.  The tax-free portion of the withdrawal would have been only $12,000 leaving her to pay taxes on $6,000 (instead of only $2,000 in the Roth IRA)</B></div> <bR> <div> <B>           after tax </B></div> <div> <B>        </B><B><U>contribution   $16,000</U></B><B>  x $18,000 withdrawal = $12,000  tax free distribution</B></div> <div> <B>         total value    $24,000</B></div> <bR> </tD> </tR> </TABLE></div> <bR> <bR> <bR> <div> <B> <A NAME="no_penalty_on_premature_distributions"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>No penalty on "premature" distributions</B></div> <bR> <div> While distributions from a Roth IRA will be taxed if taken prior to age 59½, these distributions are not subject to the 10% penalty tax, as are premature withdrawals from traditional IRAs.  In fact, the first withdrawals — up to the total contributions to a Roth IRA — are tax free, according to the rules above.  As a result, younger persons may “tap into” a Roth IRA much more easily than a traditional IRA.  Withdrawals, even before age 59½ are tax free up to the amount of contributions into the account.  Thereafter, taxes are paid only on the earnings.  After age 59½, even withdrawals of earnings are tax free (after the five-year holding period).</div> <bR> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="2" CELLPADDING="10" CELLSPACING="1" WIDTH="483" BORDERCOLORLIGHT="#FFCC66" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#006699 > <tR> <tD VALIGN=TOP HEIGHT= 195 WIDTH="455"><div> <B>Example:  </B></div> <bR> <div> <B>Fred Thompson, age 58, faces upcoming tuition payments for his youngest son.  Fred has accumulated $50,000 in his Roth IRA ($20,000 in contributions and $30,000 in earnings).  Fred could tap into his Roth IRA, up to $20,000 (the amount of his contributions) tax free this year, even though he has not reached age 59½.  Next year (with careful timing) he could tap into the remainder without tax.  Since this is a Roth IRA, none of these withdrawals would be subject a penalty tax.</B></div> <bR> </tD> </tR> </TABLE></div> <bR> <div> Generally, the 10% penalty has no impact on a Roth account — but there is one exception.  If a traditional IRA is converted into a Roth IRA, the 10% penalty on premature distributions continues to apply to the converted funds.   (see <A HREF="id90.htm" TARGET="_top" TITLE="ROTH ROLLOVERS CONVERSIONS"><U>Rollovers & Conversions</U></A>)  </div> <bR> <div>      </div> <div> <B> <A NAME="no_minimum_required_distributions"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="1" ALIGN="bottom" WIDTH="1" HSPACE="0" VSPACE="0" ></A></B><B>No minimum required distributions</B></div> <bR> <div> Another major difference between traditional IRAs and Roth IRAs is that Roth IRAs do not require distributions at age 70½.  In fact, in Roth IRAs that age has no importance.  Individuals may open a Roth IRA and contribute past age 70½, and need not take monies out at age 70½.  Indeed, monies never need be withdrawn from a Roth IRA.  This is a significant advantage for those who wish to accumulate assets to pass on to beneficiaries. </div> <bR> <bR> <div>      </div> <bR> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="2" CELLPADDING="2" CELLSPACING="1" WIDTH="76" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#FFCC66 > <tR> <tD VALIGN=TOP HEIGHT= 23 WIDTH="64"><div> <A HREF="id90.htm" TARGET="_top" TITLE="ROTH ROLLOVERS CONVERSIONS"><U><B>NEXT</B></U></A></div> </tD> </tR> </TABLE></div> <div> <I><B>  </B></I></div> <bR> <bR> </td> </tr></table></body>